Download Law of Demand

Lecture - SS 2015
Prof. Dr. K.J. Bernhard Neumärker
Matthew Bonick
Principles of Economics
4th Class: Supply and Demand.
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Today’s Concepts
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Market Forces
Types of Markets
Law of Demand
Law of Supply
Market Equilibrium
Market Forces
• Market : a group of buyers and sellers of a
particular good or service. Groups of buyers
determine demand and groups of sellers
determine supply
• Supply: The quantity of a good that sellers are
willing and are able to sell
• Demand: The quantity of a good that buyers
are willing and are able to purchase
Competitive Markets
• Market in which there are many buyers and sellers so
that each has a negligible impact on the market
• Sellers have little control over the prices
• Sellers: They know that if they raise their prices to
much, buyers will move to their competitors
• Buyers : Have little control over the market price
because each buyer as a whole only purchases a small
amount of good in comparison to the whole market of
buyers.
• Can you think of example where this is not the case?
Perfect Markets
• In this section we assume markets are
perfectly competitive
– Goods being offered for sale are all the same
– Buyer and sellers are numerous and thus cannot
influence the price. The market determines the
price and buyers and sellers are prices takers
• Examples: Wheat markets
Types of Markets
• Auctions
• Competitive Markets
– Monopoly
– Monopolistically Competitive
– Oligopoly
– Perfect competition
Demand
• Demand: The quantity of a good that buyers are
willing and are able to purchase .
• Law of Demand : Other things equal when the
price of a good rises, the quantity demanded of
the good falls, and when the price falls the
quantity demanded rises
P↑ Q↓ or P↓ Q↑
• Price and quantity demanded are negatively
related.
Demand Curves
• Demand Schedule: A table that shows the
relationship between price of a good and the
quantity of goods demanded
• Demand Curve: Graphical representation of
relationship between price of a good and the
quantity Demanded
• Example: Ice-cream
Demand Curve
Demand
• From the previous graph please create a
demand schedule
• What is the slope of the demand curve? What
does this indicate?
• How do you think we determine overall
market demand?
Market Demand
Demand Curve
• Changes to the demand curve
– Price change
• Movement along the Demand curve
– Quantity change:
• Shift of the demand curve, which indicates a change in
quantity demanded at every price
• Income
• Prices of related goods
• Preferences change
• Expectations
• Number of buyers
Why do demand curves shift?
• Income: Increase in income changes quantity
of demanded
– Normal good : Others things being held equal. A
good in which an Increase in income will increase
quantity demanded
– Example?
– Inferior good: Other things being equal an
increase in income will lead to a decrease in
demand
Why do demand curves shift?
• Price of related goods: The effect of changes
in prices of related goods.
– Substitutes: two good for which and increase in
the prices of one leads to an increase in the
demand of another
– Example?
– Complements: two goods for which an increase in
the price of one will decrease the demand for
another
Why do demand curves shift?
• Tastes : Changes in tastes effect demand
• Expectations: Expectations about the future
may effect demand
– Why is this the case?
• Number of buyers: Higher number of buyers
increase total demand
Shifts in Demand
Policy
Supply
• Supply: The quantity of a good that sellers are
willing and are able to sell
• Law of supply : Other things equal when the
price of a good rises the quantity supplied also
rises, and when the price falls the quantity
provided falls as well
P↑ Q ↑ or P↓ Q ↓
• Price and quantity supplied are positively
related.
Supply
• Supply Schedule: A table that shows the
relationship between price of a good and the
quantity of goods supplied
• Supply Curve: Graphical representation of
relationship between price of a good and the
quantity supplied
• Given the quantity and price relationship how
will the curve slope?
Supply Curve
Market Supply
Why does the supply curve
shift?
• Price changes: Movement along the supply
curve
• Quantity changes: Shifts of the curve
– Input Prices
– Technology
– Expectations
– Number of Sellers
Why does the supply curve
shift?
• Input prices:
– To produce a good inputs are necessary
– Ice cream: sugar, flower, ice-cream maker, and labor
– When the price of one of these good rises, producing
ice-cream is less profitable
– Inputs and supply are negatively related
• Technology:
– Better technology can increase the efficiency of inputs
and thus the profitability of supplying a good.
– Example?
– Technology and Supply have a positive relationship
Why does the supply curve
shift?
• Expectations: Future expectations will effect
the supply
– Example?
• Number of Sellers: Increasing number of
sellers will increase overall supply.
Shifts in Supply
Now lets combine…
• Law of Supply and Demand: The price of any
good adjusts to bring the quantity supplied
and quantity demanded for that good into
balance
• Equilibrium: The situation in which the price
has reached the level where quantity supplied
equals the quantity demanded.
Now lets combine…2
• Market Clearing Price: The price of the
good when everyone in the market has
been satisfied
• Equilibrium Price: The price that balances
quantity demanded and quantity supplied
• Equilibrium Quantity: The quantity
demanded and quantity supplied at the
equilibrium price
Equilibrium
Equilibrium
• Market forces in general drive prices to the
equilibrium point
• Surplus: A situation in which quantity supplies
is greater that demand
• Shortage: A situation in which the quantity
demanded is greater than supplies
Equilibrium
Shifts – Demand
Shifts – Supply
Example
• Draw a supply and demand curve in equilibrium.
• In the example of ice-cream
– What happens if a new and better ice-cream machine
is created
– What happens if the price of frozen yogurt ( substitute
good) rises.
• Things to look for:
– What curves shifts? And in which direction
– How will this effect the equilibrium price and quantity
The Words of the day!
• Supply, Demand, Law of Supply, Law of Demand,
Change along the demand curve, change in demand,
Equilibrium, Equilibrium Price, Equilibrium Quantity,
Surplus, Shortage, Change in supply, Change of the
quantity demanded, comparative statics
Exercise
• Try to formulate sentences where these words
make sense.
• If you have doubts about your formulation do not hesitate to
contact me.
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